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Teachers Retirement System

403(b) Rule Review

Texas law requires that TRS conduct a statutory rule review at least once every four years for each chapter of its rules.  From September 2016 to October 2017, TRS engaged in a review of the rules governing the 403(b) certification and registration program (34 Texas Administrative Code, Chapter 53), including the maximum fees, costs, and penalties that certified companies may charge for their products.  To conduct the rule review and identify rule amendments, staff undertook data gathering and analysis and received extensive stakeholder input.

In October 2017, the TRS Board of Trustees adopted final amended and new 403(b) program rules. These amended and new rules are effective December 12, 2017, except for the amended maximum fees, costs and penalties (§53.3).  The changes to the maximum fees, costs and penalties will take effect for products and investment options registered with TRS on or after October 1, 2019, and sold on or after November 16, 2019. 

Below is a summary of the major substantive and non-substantive amendments to the rules, organized by effective date, and additional information.

Substantive Changes Effective December 12, 2017

Certification Fee Increase

Tex. Rev. Civ. Stat. Art. 6228a-5 authorizes TRS to charge a company certification fee of up to $5,000 per five-year certification period. The certification fee is to recover the cost of administering the certification program, which includes the cost of developing and maintaining the list of certified companies, implementing the statutorily required annual demonstration process, and addressing legal and logistical questions involving certification. The certification fee is set at $5,000 per five-year period.

Product Registration Fee Increase

Tex. Rev. Civ. Stat. Art. 6228a-5 requires the TRS Board of Trustees to set the product registration fee in the reasonable amount necessary to recover the cost to TRS of establishing and maintaining a list of registered 403(b) investment products. The new rules tier allowable expense ratios by asset class and require submission of additional product information, which necessitates updates to the PRS. Additionally, PRS updates have been identified that will benefit the industry and make it easier for certified companies to register products.  Due to the cost of these updates, the product registration fee is set at $10,000 per five-year period.

Non-Annuity Certification Disclosures

Currently, Tex. Rev. Civ. Stat. Art. 6228a-5 establishes some minimum customer service requirements for annuity companies, but the statute is silent regarding customer service requirements for non-annuity companies. In an effort to determine customer service offerings in the non-annuity market and to assess whether companies are treating customers as retail or institutional investors, the rules have been amended to require non-annuity companies to disclose to TRS their customer service offerings in the certification application. Certification of a non-annuity company is not conditioned on whether or not the company answers “yes” or “no” to any of the questions in the customer service disclosure.

Substantive Changes Effective October 1, 2019 - November 16, 2019

Changes to Maximum Fees, Costs and Penalties for Products and Investment Options Registered On or After October 1, 2019 and Sold On or After November 16, 2019

Amended rules:

  • prohibit registration of a product with a front or back-end sales load;
  • adjust the allowable asset-based fee by asset class;
  • set separate maximum allowable fees for annuity products and non-annuity products;
  • lower the allowable loan initiation fee; and
  • increase the maximum allowable account maintenance fee.

See Tables 1 and 2 below for a detailed summary of amended fees.


Table 1
Maximum Allowable Fees
Fee TypeCurrentEffective 11/16/19
Annual Account Maintenance Fee$50$60
Loan Initiation$50$25
Front and Back End Sales LoadMaximum 6% combinedEliminate
Surrender and Withdrawal Charge10% declining annually, terminating within 10 years, or terminating in 12 years with up to a 1% fee allowed in each of the 11th and 12th years10% declining annually, terminating within 10 years, or terminating in 12 years with up to a 1% fee allowed in each of the 11th and 12th years
Asset-Based Fees2.75% annuallySeparate maximum asset-based fee caps tiered by asset class for variable annuities and mutual funds (see Table 2)
Optional FeesAllow registration of fees in excess of the capProhibit registration of fees in excess of the cap

Non-Substantive Changes Effective December 12, 2017
Restructuring of the RulesThe rules have been restructured to group together all ongoing certification and registration requirements for companies and all of TRS’s enforcement options.
Changing the Terms “Discontinued” to “Restricted” and “Inactive” to “Closed”The term “discontinued” has been changed to “restricted”.  “Restricted” refers to a TRS registered product or investment option for which an employee may not enter into a new salary reduction agreement but for which an employee may:
(A) continue to make contributions under an existing salary reduction agreement;
(B) increase or decrease the amount of contributions under an existing salary reduction agreement; and
(C) execute a revised or updated salary reduction agreement with the same or a different employer.
The term “inactive” has been changed to “closed”.  “Closed” refers to a TRS registered product or investment option for which an employee may no longer make contributions under an existing salary reduction agreement or enter into a new salary reduction agreement.
Clarifying of the Company StructureThe previous rules provided one definition of “Company” that included a platform company.  The amended rules have been updated to add a definition of “Proprietary Company” and to clarify the definition of “Platform Company”. These amendments do not substantively change who must be certified or the requirements for certification.
Clarifying the Product Registration ProcessIn 2001, the statute only required company certification and used the terms “Product”, “Qualified Investment Product”, and “Eligible Qualified Investment”.  In 2007, the statute was amended to require product registration and the term “Registered Product” was added.  The product terms evolved over time and are sometimes used interchangeably in the rules.  The amended rules clarify the usage of product terms. Additionally, the term “investment options” has been incorporated into the rules. This does not substantively change the registration requirements or process.

Table 2
Maximum Allowable Annual Asset-Based Fee
Asset ClassAnnuity ProductsNon-Annuity Products
Money Market1.90%1.65%
Diversified Bond2.25%2.00%
Asset Allocation2.25%2.00%
Large Cap U.S. Equity2.25%2.00%
Small/Mid Cap U.S. Equity2.45%2.20%
International Equity2.55%2.30%
Global Equity2.55%2.30%
Real Estate2.60%2.35%
Other2.70%2.45%

Additional Information

Grandfathering

Products or investment options that are registered before October 1, 2019 and sold through salary reduction agreement before November 16, 2019 will be restricted as of November 16, 2019.

  • Employees may continue, change or resume contributions to a restricted product or investment option under an existing salary reduction agreement or execute a revised or updated salary reduction agreement with the same or a new employer.
  • Companies with contracts entered into prior to November 16, 2019 may continue accepting contributions under the current fee caps. All new contracts entered into after November 16, 2019 must comply with the new fee caps.